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What GAO Found

About half of private sector workers in the United States—especially those who are low-income or employed by small firms—lack coverage from a workplace retirement savings program primarily because they do not have access. According to GAO's analysis of 2012 Survey of Income and Program Participation (SIPP) data, about 45 percent of private sector U.S. workers participated in a workplace retirement savings program—an estimate that is consistent with prior GAO work and other research. Using tax data to correct for under-reporting raised the share of workers participating to 54 percent, but still indicates many workers lack coverage. Among those not participating, the vast majority—84 percent—lacked access because they either worked for employers that did not offer programs or were not eligible for the programs that were offered, for example, because they were new employees or in specific jobs that were excluded from the program. In particular, lower-income workers and those employed by smaller firms were much less likely to have access to programs. However, among those who had access, the majority of these workers participated.

Key strategies to expand private sector coverage identified in the states and countries GAO reviewed include encouraging or requiring workplace access, automatic enrollment, financial incentives, and program simplification. For example, pending implementation, programs in two of the states GAO studied—California and Illinois—would require certain employers to automatically enroll workers in a state-run program, though workers could choose to opt-out. In the countries GAO studied, combining workplace access with automatic enrollment and financial incentives—tax preferences or employer contributions—has helped increase participation. Moreover, states and countries have tried to simplify program designs to (1) limit the responsibility and cost for employers and (2) reduce complexity, cost, and risk for workers. For example, some states intend to not only reduce burdens for employers by selecting and monitoring providers, but also reduce complexity for workers by limiting the number of investment options.

State and national stakeholders reported potential challenges with uncertainty created by the Employee Retirement Income Security Act of 1974 (ERISA) and agency regulations that could delay or deter state efforts to expand coverage. Generally, ERISA preempts, or invalidates, any state law relating to “employee benefit plans” for private sector workers, but different areas of uncertainty arise based on the details of each state effort. For example, four of the six states GAO reviewed intend to create payroll deduction individual retirement account (IRA) programs that would not be considered employee benefit plans. However, due to uncertainty created by ERISA, it is unclear whether a state can offer such programs or whether some of the program features would lead a court to find that they are, or relate to, employee benefit plans. Stakeholders also noted uncertainty caused by regulations from the Departments of Labor (DOL) and the Treasury meant to assist workers and employers. For example, DOL's regulation on payroll deduction IRAs was written before these state efforts were proposed and omits detail that, if included, could help reduce uncertainty. Given these uncertainties, states may face litigation and stakeholders noted that state programs could lose tax preferences if they were ruled preempted by ERISA.

Why GAO Did This Study

Millions of U.S. workers have little or no savings for retirement, potentially adding to future strains on state and national safety net programs. In addition to federal efforts, a growing number of states have proposed efforts to expand coverage in private sector workplace retirement savings programs. Other countries have also implemented similar efforts. GAO was asked to study these state and international efforts.

GAO examined: (1) recent estimates of coverage, including access and participation, as well as characteristics of workers who lack coverage; (2) strategies used by states and other countries to expand coverage; and (3) challenges states could face given existing federal law and regulations. GAO primarily used SIPP data from 2012 (the most recent available). GAO also interviewed federal officials, national industry stakeholders, and officials and stakeholders in six states (California, Illinois, Maryland, Massachusetts, Washington, and West Virginia) and three countries (Canada, New Zealand, and the United Kingdom) selected based on the range of strategies used in efforts to increase coverage and recommendations from knowledgeable stakeholders.

What GAO Recommends

GAO suggests that Congress consider providing states limited flexibility regarding ERISA preemption to expand private sector coverage. Agency actions should also be taken to address uncertainty created by existing regulations. Agencies generally agreed with GAO's recommendation. DOL plans to issue a proposed rule on state programs by the end of 2015.

For more information, contact Charles A. Jeszeck at (202) 512-7215 or jeszeckc@gao.gov.

Matter for Congressional Consideration

Status: Open

Comments: As of April 2019, no action has been taken.

Matter: To address the legal uncertainty stemming from ERISA preemption of state laws while maintaining the advantages of ERISA for both employers and workers, Congress should consider providing states limited flexibility to pursue efforts to increase coverage under workplace retirement savings programs. To do this, Congress could, for example, direct or authorize the Secretary of Labor, in consultation with the Secretary of the Treasury, to (1) promulgate regulations prescribing a limited safe harbor under which state workplace retirement savings programs with sufficient safeguards would not be preempted and would receive tax treatment comparable to that provided to private sector workplace retirement savings programs, or (2) create a pilot program under which DOL could select a limited number of states to establish workplace retirement savings programs subject to DOL and Treasury oversight. In either case, any such initiative should ensure that state programs include adequate participant protections and are subject to agency oversight, appropriate reporting requirements, and meaningful evaluation.

Recommendations for Executive Action

Status: Closed - Implemented

Comments: DOL generally agreed with this recommendation and took action to implement changes. On November 18, 2015, DOL published a Notice of Proposed Rulemaking (NPRM) on state payroll deduction IRA programs. Under the proposed rule, employers complying with the state law requirements would not create a retirement plan subject to ERISA as long as the state and the employer follows certain rules. They also published a companion Interpretive Bulletin on the same day that describes ways in which states can promote the creation of ERISA-covered plans, fully subject to ERISAs rules and protections, without triggering ERISA preemption. In 2016, EBSA published final regulations on savings arrangements established by states describing specific circumstances in which automatic payroll deduction savings programs sponsored by states would not give rise to the establishment of employee pension benefit plans under ERISA.

Recommendation: To facilitate state efforts to expand coverage in workplace retirement savings programs, the Secretary of Labor and Secretary of the Treasury should consider their authority and review and revise, if necessary, existing regulations and guidance causing uncertainty for state efforts. For example, the Secretary of Labor could direct the Employee Benefits Security Administration's (EBSA) Assistant Secretary to revise Interpretive Bulletin 99-1 to clarify whether states can offer payroll deduction Individual Retirement Accounts (IRAs) and, if so, whether features in relevant enacted state legislation--such as automatic enrollment and/or a requirement that employers offer a payroll deduction--would cause these programs to be treated as employee benefit plans.

Agency Affected: Department of Labor

Status: Closed - Implemented

Comments: The Department of the Treasury (Treasury) generally agreed with this recommendation and took action to address it. In 2019, Treasury officials reviewed a revenue ruling applicable to certain state efforts cited in GAO's report, consulted with internal experts, and determined that no ongoing concerns had surfaced from state efforts. In addition, Treasury officials compared existing regulations and guidance on Multiple Employer Plans to regulations proposed by the Department of Labor in October 2018. Treasury officials determined that the proposed regulations should help reduce the difference between the agencies regulations and did not identify ongoing areas of concern for state efforts.

Recommendation: To facilitate state efforts to expand coverage in workplace retirement savings programs, the Secretary of Labor and Secretary of the Treasury should consider their authority and review and revise, if necessary, existing regulations and guidance causing uncertainty for state efforts. For example, the Secretary of Labor could direct the Employee Benefits Security Administration's (EBSA) Assistant Secretary to revise Interpretive Bulletin 99-1 to clarify whether states can offer payroll deduction Individual Retirement Accounts (IRAs) and, if so, whether features in relevant enacted state legislation--such as automatic enrollment and/or a requirement that employers offer a payroll deduction--would cause these programs to be treated as employee benefit plans.